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The basics of estate taxes versus inheritance taxes

As the saying goes, the only two guarantees in life are death and taxes. And, for some people, receiving an inheritance after a loved one dies means that either Uncle Sam will take his share before the estate is distributed, or the state may ask the heirs to pay up, depending where they live. Therefore, it is important to understand the basics of inheritance taxes and estate taxes, and when these taxes apply.

An inheritance tax is paid by the person who inherits the estate. For example, if your Aunt Edith passed away and left you $500,000 in her will, you may be personally liable for paying taxes on that $500,000. Only certain states have an inheritance tax. New Jersey is one of those states. The state inheritance tax in New Jersey depends on the size of the inheritance and the relationship between the heir and the decedent. There is no federal inheritance tax.

However, as many people may be aware, there is a federal estate tax. The estate tax is paid out of the estate assets before any money or property is handed down to the deceased’s heirs. Some states also have estate taxes, but New Jersey is no longer one of them. Only the wealthy are subject to the federal estate tax. As of 2019, the federal estate tax only applied to estates worth $11.4 million or more for single individuals and $22.8 million for those who are married. Any lesser estates are entirely exempt from the federal estate tax.

So, in New Jersey, most people will never need to worry about the federal estate tax, and only some will need to pay an inheritance tax. While the idea of paying taxes is not something most people like, it is important to understand when they apply, so that a person does not run afoul of the IRS or the New Jersey Division of Taxation.